Uganda’s private equity market is facing uncertainty as huge costs of starting and running businesses, coupled with a heavy regime of taxes combine to dissuade external investors from pumping in money.

According to analysts, multiple income taxes are levied on earnings generated from investing companies and private equity funds, as well as cash received by their sponsors. It amounts to a tax expenditure ratio of 68-87 percent for every $1 made in a selected business.

Under the current tax regime, profits earned by a business that benefits from private equity investment are subject to a corporation tax rate of 30 percent and a withholding tax rate charged on dividends of 15 percent.

Revenues received by private equity firms from companies invested in are also subject to a corporation tax rate of 30 percent and withholding tax of 15 percent levied on dividends. And dividends received by sponsors that contribute capital to private equity funds are equally subject to 15 percent withholding tax.

“For example, an equity investment of $500,000 in a single business might yield revenues of $100,000 at the end of the year. Deduction of corporation tax and withholding tax on dividends means the fund manager receives around $55,000,” explained Kim Kamarebe, managing partner at INUA Capital.

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"A private equity firm might invest $10 million in 30 different businesses every year, but multiple income taxes usually erode returns on investment," he argued.

“For this reason, most private equity funds registered in Uganda earn little from their operations and are reduced to pursuing social impact gains.”

Whereas many private equity funds enjoy average returns estimated at 25-30 percent per year from their investment portfolios, a hostile tax regime implies a net return of less than 10 percent for local private equity fund managers. This scenario has apparently discouraged many foreign players from entry.

Some foreign investors prefer to utilise foreign investment vehicles to lend money to Ugandan businesses for fear of a hostile legal regime.

Due diligence costs

Huge due diligence costs incurred by private equity funds seeking to invest in Ugandan businesses are also blamed for low foreign participation in this segment.

Following two court cases filed by Ugandan businessmen against foreign lenders in 2020 and 2022 over “unfair” recovery of money owed the latter, many foreign private equity players developed jitters over local finance transactions.

“Cutting the tax burden in Uganda’s private equity industry is attainable. The government offered a lower withholding tax rate of 10 percent on interest earned from treasury bonds with duration of more than 10 years in the government debt market. A similar tax incentive could be applied to the private equity industry,” said Allan Lwetabe, Director for Investment Operations at Uganda Deposit Protection Fund.

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Asset managers have been engaging the Uganda government over the issue and there have been indications the government will agree to drop the new tax proposal targeting interest earned from unit trust savings.

In 2020, Ham Enterprises, Kiggs International Uganda and Hamis Kiggundu sued Diamond Trust Bank Uganda and Diamond Trust Bank Kenya over illegal recovery of money lent to the former, citing lack of a lending licence by one of the lenders and their inability to do business in Uganda. Though the businesses won the case in the High Court of Uganda, the banks appealed the ruling in the Court of Appeal.

In 2022, Patrick Bitature sued Vantage Mezzanine Fund II Partnership over recovery of a $32 million debt owed the latter. Whereas the lender extended $10 million to Patrick Bitature in 2014 for purposes of financing hotel and real estate construction projects, the borrower was obliged to commence loan repayments in 2017 but defaulted for more than three years, accumulating unpaid interest and penalties against the loan facility. The borrower later claimed he had signed the loan agreement by mistake.